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Wednesday, January 20, 2016

From Understudy to Star: Craft Brewing's Decade

Craft beer doesn't seem like a recent phenomenon. (For the purposes of this post, "craft beer" means anything made by smaller American breweries from the late 1970s onward.) Most of us will recall hearing something about it before I started this blog a decade ago. Some will remember drinking it back as far as the Reagan administration. But in some very real ways, it is recent. Until the middle 2000s, craft beer was a niche product in all but the beeriest of cities. Let's trot through some numbers to illustrate just how stark the change has been.

This draft array, sighted this week in Yuma, AZ,
is typical of what you used to find--in, say, 2006.

In 2005, craft breweries combined to brew 6.3 million barrels, which was just 3.2% of all beer sold in the US that year. At the end of 2014 (the most recent date with numbers), that figure had more than tripled to 22.2 million barrels, or 11.3%. (Total barrelage was nearly identical for both years at just over 197 million.) When they finally get to totting up the figures for 2015, it should be around 25 million barrels, or 14.5% of the entire market. Since 2005, the craft beer segment's worst year-over-year growth was 5.8%; it fell below double-digit growth only twice, and that was during the throes of the great recession.

In 2006, Oregon was well ahead of most of the country in adopting craft beer, with Portland and Bend leading the way. I couldn't find the statistics for overall consumption in 2005, but I think it was probably close to the national stats we'll see in 2015. In 2006, craft beer was already a generation old, and it had only managed to cobble together a 3% share of the beer market. There was a general sense that it was never going to become a huge player, and when people looked at Oregon's stats, they tended to dismiss them as cultural outliers. No one believed the rest of the country would ever achieve that kind of penetration.

I'd argue that the psychological change in the last ten years has been far greater than even the growth in barralage. In 2006, craft beer could provide owners with a nice little business. No one imagined that it constituted a real threat to mass market lagers. Last year, big breweries paid tens of millions, and in one case a billion dollars for modest-sized craft breweries. Even in 2006, there were craft breweries the size of 2015's Ballast Point and Lagunitas, but the idea that a large brewery would spend half a billion or a billion on them would have been inconceivable. The reason is because the idea that craft beer would one day become the dominant force was also inconceivable. Now it's conventional wisdom, and large breweries are willing to pay a massive premium in order to position themselves to compete in this world in the future.

Beyond sheer growth, there's a change in the distribution of breweries as well. Have a look at the total production by type of brewery. These are the Brewers Association's categories; a regional brewery makes more than 15,000 barrels and a micro makes fewer than 15,000.

The share of production by big breweries is now over three-quarters of the market, and that's the segment of real barrel growth. In the coming few years, the percentage of beer produced by the biggest craft breweries will likely pass 90%. In a market where there are fewer bigger players, you'd expect consolidation, and that's what we're already seeing.

One of other interesting trend is the types of new breweries getting founded. If you wanted to identify a bubble somewhere in the market, this might be a place to look. It appears that people are betting on production facilities rather than brewpubs.

This again isn't surprising; with all the potential money to be made, starting a production brewery looks like an attractive option. But it means that there will be many more players trying to compete for a piece of the pie dominated by large breweries. I expect that means we'll start to see brewery failures rise in the future--even if, overall, there's not yet a bubble.

In 2006, as I started this blog, craft brewing was just a sleepy little current in the overall beer market--still a "boutique" segment. In the next decade, growth has been so strong that it is now a given that it's the future of beer. Imagine what the next decade will hold.

3 comments:

The giant regional breweries really aren't craft breweries in any meaningful sense. I'm sure many will rush to defend Sierra Nevada, Deschutes, Widmer and the rest. But these folks have transcended the term "craft," which suggests limited scale and artisan. It isn't that the giant craft breweries don't make good beer; it's that they are highly automated operations. And thanks to their size, reach and purchasing power, they enjoy very substantial advantages over small craft breweries such as you find in a typical brewpub. These guys aren't remotely playing on the same field, yet we include them in the same stats. That needs to be fixed somehow.

Nice recap of the beer revolution over the past 10 years or so. It's been wonderful for this beer aficionado. You can find good beer just about anywhere now, even crappy dive bars and sketchy convenience stores.

On a side note, what the hell were you doing in Yuma? Passing through, I hope?